15% tax rate in Iskandar only for certain target group

PETALING JAYA: Knowledge workers in Malaysia who are considering packing up to move to Iskandar Malaysia in Johor to take advantage of the 15% income tax rate proposed a year ago, better think again. The incentive is not for those who are already employed in the country. Instead, it appears that the main target group is knowledge workers based overseas.

In addition, the Government has formulated what some people feel is a narrow definition of the knowledge workers who qualify for this scheme.

These conditions have surprised many industry players and tax experts because they had expected the flat tax rate of 15% – in comparison with the normal income tax rates for individuals, which go up to 26% – to act as a broad invitation to local and foreign talent to relocate to Iskandar Malaysia and thus boost the region’s development. Some of the observers have called for a review of the terms of eligibility.

“The criteria should not be restrictive to that effect. As a start, the aim should be to attract knowledge workers in the identified industries regardless whether they were working in Malaysia before that. Over the long term, this will help persuade more people and businesses to move to Iskandar Malaysia,” said Chartered Tax Institute of Malaysia president Khoo Chin Guan.

National ICT Association of Malaysia (Pikom) chairman Wei Chuan Beng argued that the incentive would be more effective if it was also open to those currently based in Malaysia, because it would spur investors who already had a presence elsewhere in Malaysia to diversify to Iskandar Malaysia.

“I use this analogy – Is it easier to acquire new customers or to sell to existing customers? The incentive is a good way to encourage businesses in Malaysia to seek growth by going to Iskandar Malaysia. To do this, they need a few key people to seed the new ventures, and the lower tax rate will be a strong factor,” Wei said.

The Iskandar Regional Develop-ment Authority (Irda) said there was no change in the intent of the incentive scheme, which was to attract knowledge workers from abroad and within to live and work in Iskandar Malaysia.

Said CEO Ismail Ibrahim: “However, it is not eligible to existing taxpayers in Malaysia because the scheme is intended to attract new knowledge workers to Iskandar Malaysia and not to ‘cannibalise’ existing knowledge workers from other parts in Malaysia. This will also protect the existing tax revenue base.”

When tabling the Budget 2010 on Oct 23 last year, Prime Minister Datuk Seri Najib Tun Razak proposed the 15% tax rate on employment income of Malaysian and foreign knowledge workers residing and working in Iskandar Malaysia. He said those eligible must be engaged in certain qualifying activities and must also add value in their respective fields.

Gazetted early this month, the Income Tax (Determination of Knowledge Worker, Qualified Activity and Specified Region) Rules 2010 gives the details of the incentive. The Iskandar Malaysia website also provides frequently asked questions to explain the incentive scheme. Irda said it was accepting applications from qualifying professionals who commenced employment in Iskandar Malaysia on or after Oct 24 last year. The application period ends on Dec 31, 2015.

The most striking of the conditions to qualify for the 15% tax rate is that the person “must not have derived any employment income in Malaysia at least three years before” applying for the preferential tax treatment. This rules out virtually anybody who has a job in Malaysia at present.

The applicant is assessed on two sets of criteria, one for the applicant himself and the other for his employer. For example, the rules prescribe the university qualifications and work experience that the applicant should have. The employer is required to undertake any of the qualifying activities listed in the rules, within any of Iskandar Malaysia’s five flagship zones.

Ang Weina, executive director of Deloitte Malaysia’s tax practice, described the rules as “quite a letdown” in light of the fight against brain drain, particularly when considering that the Malaysian income tax structure is not competitive within the region and that Singapore is so close to Iskandar Malaysia.

“Yes, we can see that the incentive is meant to be a step towards Malaysia becoming a high-income economy, but does it help in retaining talent?” she asked.

However, Ismail of Irda said the authority was confident that the incentive would bring back Malaysian talent as well as attract foreign knowledge workers. He pointed out that the development’s tipping point was just a year away. “When that time comes, we will see many high-impact investment projects requiring knowledge workers being operationalised. Companies will also benefit from this scheme,” he added.

He said Irda did not plan to change the criteria for the incentive but added that they were not cast in stone. “As we move along and implement the scheme, we will take into consideration the feedback we obtain from key stakeholders.”

By The Star Online

Source: http://biz.thestar.com.my/news/story.asp?file=/2010/10/29/business/7317657&sec=business